"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Saturday, July 30, 2011

Krugman and the Baby Sitters, Chapter Two.

Hi all. Read the previous post to get filled in on the baby sitting revelation Paul Krugman had, and how he realized from it that printing money will solve all recessions.

We are in the middle of pointing out fatal flaws in his reasoning, showing how his analogy is absurd many times over. Last blog we pointed out one major flaw; this blog we point out another.

The reasoning by analogy Krugman uses goes like this.
Just as
1. There was a shortage of coupons, and
2. Printing more coupons solved the problem,
so too
3. A recession in an economy means a shortage of money, and
4. Printing more money solves the problem.

Let's point out that this is not a serious way to think things through. We could equally substitute for 3 and 4 above the following
3. A housing shortage means there are not enough deeds to houses.
4. Printing more deeds [not building more houses] solves the problem.

3. A shortage of doctors means there are not enough doctors' diplomas
4. Printing more diplomas [not training more doctors] solves the problem.

3. A famine means there are not enough food stamps for everyone.
4.  Printing more food stamps [not growing more food] will end the famine.

The flaw, of course, lies in statement 3 each time. If any of the 3's are correct, then the analogy is perfect. But are the 3's correct? One thing is for sure, the baby sitting story doesn't prove anything about the 3's being true or false. That has to be answered by examining the 3's on their own merits, not by saying they are like baby sitters.

Let's now go into the nitty gritty. We'll examine the baby sitting story, and why printing coupons worked for them. Then we'll look at recessions and see if printing money will solve them, too. But this much should be clear already, that the two situations, baby sitting and recessions, have nothing to do with each other until proven otherwise, which Krugman has not done.

What was missing in the baby sitter community, and how did printing coupons fill that need? What is missing during a recession, and will printing more money fill that need?

We'll start with the baby sitters. What were they missing? Certainly not coupons in and of themselves. No parent would leave their child alone in the house with a coupon as the baby sitter. What was missing were willing baby sitters. By agreeing to have more coupons printed, the housewives were agreeing to honor those coupons if presented with them. In other words, the coupons represented an agreement on the part of the housewives to babysit more hours. Which is exactly what was missing.

That's why the new coupons solved the problem. They were not empty papers; they were assumptions of responsibility by the housewives to babysit on demand. The problem was not enough willingness to babysit. The solution was voluntary willingness to baby sit more. The coupons were just written expressions of this new willingness.

If the problem is not enough houses, more deeds to nonexistent houses won't solve anything. The solution is more houses, not more paper. Same with doctors and food. The shortage is doctors and food; the solution is getting more doctors and more food, not more paper.

What about during a recession? What is the problem? What is missing? Krugman the Keynesian assumes [without proof] that the problem is lack of aggregate demand, meaning not enough people want to buy what is being produced. They would rather hoard their money, those silly geese. The solution is then, given this unproven assumption,  finding a way to make people want to buy what is being produced. Krugman suggests the way to do it is give people more dollars. Simple. Exactly like the baby sitters.

But the baby sitter story certainly doesn't prove the initial assumption about recessions, that they are caused by an unwillingness to spend. So the baby sitting story teaches us nothing about the cause of recessions.

And even given Krugman's assumption about what the problem is [not enough spending], dollars are not voluntary promises to spend, as coupons are voluntary promises to babysit. So that even if we grant for the moment the mistaken assumption that the problem is the same, lack of willingness, the solutions offered are not the same. A new coupon can only be printed in the first place if the housewives agree to its being printed, meaning they agree to babysit more. A newly printed dollar, on the other hand, certainly doesn't represent a newly promised willingness to spend, like a coupon does. It doesn't even encourage more spending necessarily, as we found out during this recession, when Bush gave everyone money to spend, and they used it instead to pay off debt. The recession, needless to say, was untouched. [Not to mention that more coupons don't hurt anyone, but more dollars hurt the old and the sick and eventually everyone, as we explained in the previous article]

So much for Krugman's take on recessions. Now let's talk about what is really going on. Austrian Economics claims that the problem in a recession is too much money printing in the years leading up to the recession. [See this article]. So that of course it has nothing to do with babysitting. There the problem was unwillingness to work, here the problem is too much paper. Obviously the two situations have nothing to do with each other.

Equally obviously, if that is the problem, too much money printing, then printing more money can only do more harm. If ones problem is overeating, stuffing oneself on potato chips is not going to help.

Summing up, the only basis for the analogy is the very weak one that baby sitting coupons are made out of paper and so is money, so that what is true of one is true of the other. Laid bare this way, its silliness is obvious.

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